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PSX DERIVATIVE

SEGMENT
DEVELOPMENT

Presentation by:

Mr. Sani-e-Mehmood Khan


General Manager - Pakistan Stock
Exchange (PSX)

Date: November 29, 2016


DERIVATIVE SEGMENT DEVELOPMENTPRE REQUISITES

A
Properties of

Fair, Vibrant and Inclusive Capital Markets


Fair, Vibrant and Inclusive
Capital Market is the basic pre-requisite for an efficient
DERIVATIVE SEGMENT

environment and
Deep and Liquid

Product Suite
Ready Market

Participation
Institutional
Inclusion
Financial

Enabling
Roadmap for Market Development 2

Pakistan Stock Exchange Limited 2


FINANCIAL INCLUSION
FINANCIAL INCLUSION

Indicator Pakistan Turkey Bangladesh Thailand


Population 197,000,000 73,722,988 158,570,000 66,870,000
# of Investors 216,996 4,132,704 (5.6%) 2,804,629 3,050,000
(.13%) (1.77%) (4.6%)
Insurance 0.7% 1.28% 0.94% 4.1%
Penetration
# of CIS Unit 140,000 (.075%) 3,626,017 (4.9%) N/A 1,550,000
Holders (2.3%)
Participants of 2,000 2,638,310 (3.6%) N/A 3,400,000
Pension Funds (.001%) (5.1%)
Savings Rate 13.8% 12.7% 19% 30.7%
Literacy Rate 56% 90.8% 48.8% 93.5%

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DEEP AND LIQUID MARKET
DEEP AND LIQUID READY MARKET

MARKET HAVING OVER 1 BN $s AVG DAILY VALUE TRADED


US, India, Thailand, Turkey, France, Hong Kong, Germany, Korea, UK, Russia, and Japan
are amongst the Markets which observe an average daily value traded which is over and
above US $ one billion per day.
MARKET HAVING 500-999 MLN $s AVG DAILY VALUE TRADED
Mexico, Malaysia and Singapore are the nations which observe an average daily value
traded between 500-999 Millions of US $s per day

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DERIVATIVE PRODUCTS, ACROSS ASIA AND ACROSS GLOBE

Types of Derivative Products


Market
Region Country Futures Options Forward
Classification
SSF SIF SSO IO DFM
Hong Kong Developed
Japan Developed
Singapore Developed
China Emerging
India Emerging
Indonesia Emerging
Korea Emerging
Asia
Malaysia Emerging
Philippines Emerging
Thailand Emerging
Bangladesh Frontier
Pakistan Frontier
Sri Lanka Frontier
Vietnam Frontier

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DERIVATIVE PRODUCTS, ACROSS ASIA AND ACROSS GLOBE

Types of Derivative Products


Market
Region Country Futures Options Forward
Classification
SSF SIF SSO IO DFM
United States Developed
Canada Developed
Americas Mexico Emerging
Brazil Emerging
Colombia Emerging
Saudi Arabia Emerging
Middle East & Jordan Frontier
Africa Qatar Emerging
South Africa Emerging
United Kingdom Developed
France Developed
Germany Developed
Europe
Israel Developed
Russia Emerging
Turkey Emerging

Pakistan Stock Exchange Limited 8


PRODUCT POSITIONING: INDIAS GLOBAL RANKING

Index Options

Single Stock Futures


Index Futures
2
Equities
3
3
4

Equity derivatives turnover 12.6 times of cash market in FY13

Pakistan Stock Exchange Limited 9


PSXPresent Dynamics, Derivative Product Suite

Stock
Index
Futures

Ready
Market
Cash
Deliverable
Settled
Futures
Futures

DFM turnover accounts for 0.17% of cash market in FY15-16

Pakistan Stock Exchange Limited 10


PRODUCT SUITE

*FOCUSES only on the inactive derivatives


CASH SETTLED FUTURES, PRODUCT OVERVIEW

What are Cash Settled Futures?


Standardized 90 Days Contracts to buy/sell single stock futures to be settled in cash
M2M is settled in cash on daily basis using Daily Settlement Price
Attracts VaR Margin on open positions
Contract are concluded on basis of underlined instruments price on Cash Counter
The result of the trade is the cash difference between the bought and sold price.

Pros
No requirement to settle principle amount
No requirement to square-off the open position
Provides 6-7 times leverage for retail audience
There shall be no obligation to deliver shares at the end of contract

Cons
Small investors may become the victim of smart institutional hedging
Does not contain risk of delivery pressures at the end of contract as observed in March 2005

Pakistan Stock Exchange Limited 12


PRODUCT OVERVIEW, CONTRACT SPECIFICATION

Period Contract
90 or 30 days

Opening of Contract
First Trading day of the next week following the close of the contract.

Overlapping Period
None.

Expiration Date/ Last Trading day


Last Friday of the calendar month, if last Friday is not a trading day, then
immediate preceding trading day.

Final Settlement
Cash settlement on T+1 basis on the expiration date.

Contract Value
The Contract Value shall be the product of Futures price and the Contract Multiplier

Pakistan Stock Exchange Limited 13


CSF TRANSACTION LIFE CYCLE, DAILY SETTLEMENT PRICE

Sr# Volume Rate Value


1 500.00 10.00 5,000.00
2 1,500.00 10.05 15,075.00
India, Brazil,
3 6,000.00 10.10 60,600.00 Philippines
4 500.00 10.05 5,025.00 Athens, and
5 3,000.00 10.10 30,300.00 Mexico use
6 21,000.00 10.15 213,150.00 similar CSF
7 1,000.00 10.15 10,150.00 closing price as
8 9,000.00 10.20 91,800.00 DAILY
9 500.00 10.20 5,100.00 SETTLEMENT
10 5,500.00 10.20 56,100.00 PRICE.
11 2,000.00 10.20 20,400.00 i.e. Volume
12 26,000.00 10.20 265,200.00 weighted price of
13 1,000.00 10.15 10,150.00 last 30 minutes
77,500.00 788,050.00
for each stock.
Total Volume of Last 1/2 Hours 77,500.00
Total Value of Last 1/2 Hours 788,050.00
Daily Settlement Price 10.17

Pakistan Stock Exchange Limited 14


CSF TRANSACTION LIFE CYCLE, DAILY SETTLEMENT PRICE

Suppose a buy transaction takes place at RS 41/=

Open Daily PLS/M2M Close MGN


Prevailing
Days Scrip Trade Type Trade Qty Contract Settlement Settlement Contract Requirement
Trade Rate
Value Price On T+1 Value at EOD

1 LUCK-CJUN BUY 41.00 1,000.00 41,000.00 42.50 1,500.00 42,500.00 7,437.50

2 42.50 1,000.00 42,500.00 44.00 1,500.00 44,000.00 7,700.00

.. 44.00 1,000.00 44,000.00 46.90 2,900.00 46,900.00 8,207.50

.. 46.90 1,000.00 46,900.00 48.50 1,600.00 48,500.00 8,487.50

.. 48.50 1,000.00 48,500.00 49.80 1,300.00 49,800.00 8,715.00

.. 49.80 1,000.00 49,800.00 48.10 (1,700.00) 48,100.00 8,417.50

.. 48.10 1,000.00 48,100.00 48.30 200.00 48,300.00 8,452.50

Profit/Loss till 2nd last day of the contract======== 7,300.00

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CSF TRANSACTION LIFE CYCLE, DAILY SETTLEMENT PRICE

Daily
Prevailing Gain/Loss on
Days Scrip Trade Type Trade Qty Contract Settlement
Trade Rate T+1
Value Price

1 LUCK-CJUN BUY 41.00 1,000.00 41,000.00 42.50 1,500.00


2 42.50 1,000.00 42,500.00 44.00 1,500.00
.. 44.00 1,000.00 44,000.00 46.90 2,900.00
.. 46.90 1,000.00 46,900.00 48.50 1,600.00
.. 48.50 1,000.00 48,500.00 49.80 1,300.00
.. 49.80 1,000.00 49,800.00 48.10 (1,700.00)
.. 48.10 1,000.00 48,100.00 48.30 200.00
Profit/Loss till 2nd last day of the contract======> 7,300.00
What happens when you take a position on CSF and continue to hold?
5% pre-trade Margin is required for the placement of order
Subsequent to order execution 1-Day VaR is payable immediately after trade-generation by KATS
M2M/Gain-or-loss is settled in cash on daily basis using Daily Settlement Price
The next day open position is set at last days daily settlement price prevailing at CSF
Contract are concluded on the last day using the FINAL SETTLEMENT PRICE of underlined
instruments price on Cash Counter

What happens when you offset your open position?


The result of the trade is the cash difference between the bought and sold price.
The difference is credited/debited to your account on T+1 basis
Open position is not carried forward anymore
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CSF TRANSACTION LIFE CYCLE, FINAL SETTLEMENT PRICE

One Minute BID ASK Sum


Sr#
Interval X Y X+Y
1 12.15 47.2 47.25 94.45
2 12.16 47.2 47.25 94.45
The average bid / ask quote of the 3 12.17 47.15 47.2 94.35
47.15 47.2 94.35
scrip in the Ready Market which 47.1 47.15 94.25
would be calculated as a ratio of 47 47.15 94.15
A/B where A equals the sum of 47.4 47.45 94.85
108 14.12 47.35 47.4 94.75
market bid and ask prices taking 109 14.13 47.4 47.45 94.85
the best bid and best ask prices 110 14.14 47.35 47.4 94.75
of the scrip during each one Total 104.14
Total Bid
minute interval for last two hour Count 110
trading. Total Ask
Count 110

Final Settlement Price (FSP)


FSP = 10414.5/220
FSP = 47.35068

India, Brazil Athens and Malaysia use underlined assets closing price as Final
Settlement Price
Pakistan Stock Exchange Limited 17
CSF TRANSACTION LIFE CYCLE, FINAL SETTLEMENT PRICE

Daily
Prevailing Gain/Loss on
Days Scrip Trade Type Trade Qty Contract Settlement
Trade Rate T+1
Value Price

1 LUCK-CJUN BUY 41.00 1,000.00 41,000.00 42.50 1,500.00


2 42.50 1,000.00 42,500.00 44.00 1,500.00
.. 44.00 1,000.00 44,000.00 46.90 2,900.00
.. 46.90 1,000.00 46,900.00 48.50 1,600.00
.. 48.50 1,000.00 48,500.00 49.80 1,300.00
.. 49.80 1,000.00 49,800.00 48.10 (1,700.00)
.. 48.10 1,000.00 48,100.00 48.30 200.00
Profit/Loss till 2nd last day of the contract------> 7,300.00
What happens to the open positions at the end of CSF Contract?
Contract are concluded on the last day using the FINAL SETTLEMENT PRICE of underlined
instruments price on Cash Counter
120 readings of bids and offers of last 2 hours are taken
The open positions does not require an square-off, gain-or-loss is collected on the basis of final
settlement price and the contract is concluded

What happens when you offset your open position?


The result of the trade is the cash difference between the bought and sold price.
The difference is credited/debited to your account on T+1 basis
Open position is not carried forward anymore
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CSF TRANSACTION LIFE CYCLE NETTING REGIME, RMS, & LIMITS

Netting Regime?
Netting SHALL NOT be allowed between buy and sell position in same scrip for different clients
Netting SHALL NOT be allowed between buy and sell position in different scrip for same client
Netting SHALL NOT be allowed across different contracts(30, 60, 90) for same client in same scrip
Spread Discounts shall soon be available as the volumes pick-up

Risk Management?
Open positions to attract Ready Market VaR Margins applicable at client level
Margin are payable 100% in securities and will soon be in Cash
Normal haircuts are applied on the collaterals
KSE has resisted and not imposed special margins and profit retention, however, concentration
margins shall be introduced subsequent detailed presentation to member community

Capital Adequacy Limit?


CAL shall continue to be in the multiple of NCB times 25 of a member
With the conclusion of CFS and DFM, a member can utilize 10 times of its NCB in CSF

Position Limits?
Market wide limit per scrip is 40% of the free float
Member-wide limit per scrip is 10% of the free float
Client-wide limit per scrip is 1% of the free float

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CSF TRANSACTION LIFE CYCLECORPORATE ACTIONS

Adjustments in case of RIGHT ISSUE?

The contract multiplier will be adjusted against RIGHT issue in the underlying scrip
When there is 1-for-2 right issue, the contract multiplier will be adjusted to
750 from 500 in the following manner
750 (500 X 3/2)
On the ex-right date
The buyer or seller can square-off their open positions in the multiple of lot-sizes
KSE shall soon be revising lot-size to 1 and CSF contract multiplier

Cash Dividend?

In case where cash dividend is declared in a scrip, no adjustment would be made by the exchange
The market to re-adjust in consideration of cash dividend.

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CSF TRANSACTION LIFE CYCLECORPORATE ACTIONS

Existing Contract
Adjustment of Bonus
Issue? Contract Vol Futures Price Contract Value
Open positions to attract 500.00 540.00 270,000.00
Ready Market VaR Margins
applicable at client level
When there is a 1-for-2 bonus Conpany Announces 1.222 Shares for each share
shares issue i.e. for every 2
existing shares,
the holder gets one additional Revised Contract
shares
The Exchange: shall adjust
the prices in the following Contract Vol Bonus Multiple Bonus Shares
manner 500.00 1,222.00 611.00
Original Volume 500.00
Revised Contract Volume =======> 1,111.00

New Contract Price is determined by dividing


Old Contract Value by Revised Contract Size

Old Contract Value 270,000.00


Revised Volume 1,111.00
Revised Price 243.02

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PRODUCT REVIEW, STOCK INDEX FUTURES

Stock Index Futures is simply buying or selling a specified number of


contracts, whose mark-to-market difference is settled in cash on daily basis.
Contract Duration Standardized 90 days Contracts

Contract Start Date first day following the last Friday of Each Month

Contract End Date Last Friday of respective Month

Daily PLS Settlement Volume weighted average value of last half hour of trading in relevant stock
index futures contract multiplied by contract multiplier.
Final Settlement Same as of CSF, except that SIFC uses underlined index values

Contract Multiplier RS 5/=, Minimum Fluctuation one index point of KSE-30

Contract Unit Numerical Value of underlined Index i.e. KSE-30

Exposure Margin and VaR marginsof exposure


Deposits

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PRODUCT REVIEW, STOCK INDEX FUTURES

OPERATING PARAMETER OPERATING VALUE

Contract Unit Value of Underlying Index


Contract Multiplier RS 5
Margin Requirement VaR values around 6%

CURRENT KSE-30 INDEX = 6000


TRANSACTING VOLUME = 5
---------------------------------------------------------------
CONTRACT VALUE = 30,000
============================================

*3750exposure margin, and RS 5 per index point movement is the gain or loss

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TRADING SCENARIO, READY/DFM TRADING

Delivery Based Products

Cash Management

DVP DVP
Bank/ T+2 Settlement 30 days contract
Personal Traded at PSX Traded at PSX
Borrowing Settled by NCC Settled at NCC
(K+4) Features
Bull Run
Ready Future Arbitrage Go long in DFM
pay at the end of DFM
Borrow Cash

Settle Ready Go long in Ready Bearish Run


Go short in DFM
on T+2
Sell in DFM (K+4+n) Buy/lift delivery at the end of
contract

Past Experiences
March 2005 Crises was triggered due to delivery pressures in the 4th week of March 2005

SECP advised to introduce non-deliverable-CSF to avert delivery requirement on the end of long position holders.

2008 syndrome appear to be a mere re-occurrences, PSX introduced CSF in 2007.

Pakistan Stock Exchange Limited 24


TRADING SCENARIO, READY/CFS TRADING

Delivery Based Products

Cash Management

CFS DVP DVP


Financier T+2 Settlement 22 days contract
offer Traded at PSX Traded at PSX
Financing@ Settled by NCC Settled at NCC
(K+4) Features

Buy in Ready Market


Get CFS on a agreed premium rate Always for Bull Run
Release CFS Trade with Cost of Carry Doesn't Support Bearish
Sell in Ready Market Trend
Settle Ready
on T+2

Past Experiences
Carrying one transaction forward involves 3 additional transaction.

Exorbitantly high cost of transaction, brokers lending risk is on the clearinghouse.

Carries huge incentive to default.

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TRADING SCENARIO, READY/CFS TRADING

Cash Settled/Non-Deliverable Products

Cash Management

DVP CSF
Use of T+2 Settlement 90 days contract
Futures and Traded at PSX Traded at PSX
Financing Settled by NCC Settled at NCC
tool. Lender
should go
Features
short in
CSF and go Hedging
long in Buy in Ready Market Supports Bull Run
ready to Go short in CSF Support Bearish Trend
earn return No need to square the trade in CSF
at KIBOR+n Lend in Ready and earn money
Loss is hedged against down-trend

Past Experiences
Investors tend to use CSF. The fear factor prevalent at Brokers is impeding the volumes in this product.

Presence of Circuit Breakers is yet another impediment in the growth of this product.

Institutions are allowed to do financing in CFS. However, they Mutual Fund cannot trade on CSF.

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TRADING SCENARIO, READY/SIFC TRADING

Cash Settled/Non-Deliverable Products

Trading Strategy

The SIFC price DVP CSF


will follow the T+2 Settlement 90 days contract
level of a Traded at PSX Traded at PSX
hypothetical Settled by NCC Settled at NCC
portfolio of Features
stocks (KSE-
30) to increase
Choices
or decrease
Buy KSE30 Basket Supports Bull Run
their exposure
Sell the Index (SIFC) Support Bearish Trend
to Countrys
Do Not buy KSE-30 Basket
only Capital
Just Go Short in SIFC
Market

Past Experiences
International consultants have regarded this as an excellent arbitrage and hedging tool.

Yet the fear factor and Presence of Circuit Breakers remains a key impediment in the growth of this product.

Institutions are allowed to do financing in CFS. However, Mutual Fund cannot trade on CSF.

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THANK YOU
For any further information or queries please contact:
helpdesk@psx.com.pk or sani.khan@psx.com.pk

Serving Investors & Industry


Stock Exchange Building, Stock Exchange Road, Karachi-74000, Pakistan.
Tel: (+92)111-001-122, Website: www.psx.com.pk